The company released its 2024 quarterly report. In the first quarter of 2024, the company achieved revenue of 1.52 billion yuan, down 8.0% year on year and 20.3% month on month; realized net profit of 165 million yuan, down 32.8% year on year and 22.9% month on month; realized net profit after deduction of 184 million yuan, down 19.5% year on year and 12.8% month on month. Gross profit margin of 27.2%, -4.3pct year over year, +1.1 pct month-on-month. Net sales margin 10.8%, -4.3pct year on year, +0.05pct month-on-month. Fair value profit and loss of non-recurring profit and loss was -029 million yuan, which was another major drag on the company's net profit due to mother.

New projects are expected to contribute to growth in 2024, and the amount of fluorinated liquid and perfluoroisobutyronitrile is worth looking forward to. In terms of production capacity layout, Hysford Phase II began trial production in Q4 2023, and all production lines have basically achieved stable output. Part of the production line of the Heidford High Performance Fluorine Materials Project (Phase I) was put into operation in Q4 2023, and the overall project is expected to reach the scheduled state of use around mid-2024. The company has now achieved stable production capacity of thousands of tons of fluorinated liquid, leading its peers in production capacity and product performance. It now supplies mainstream semiconductor manufacturers around the world. It is also the first kiloton production line for perfluoroisobutyronitrile in China. The two major products are expected to accelerate in 2024 against the backdrop of leading overseas production capacity withdrawals.

Overseas production capacity may be withdrawn at an accelerated pace, and the release of fluorinated liquid is expected to accelerate. 3M added more than 10 billion US dollars in litigation fees in 2023 due to environmental issues. According to the latest report by Belgian financial daily De Tijd in January, 3M's Belgian factory will shut down in mid-2024, which is much ahead of schedule by the end of 2025. 3M is the world's leading manufacturer of high-end fluorine chemicals. Semiconductor-grade fluorinated liquids (used for temperature control and cleaning) occupy a leading global share, and lead the world in R&D and production of perfluoroisobutyronitrile.

We believe that in the context of the accelerated withdrawal of 3M production capacity, careful consideration may be given to the possibility that there may be some downstream inventory. The company's second- and third-generation core products, such as fluorinated liquid and perfluoroisobutyronitrile, may achieve accelerated release or sharp increases in volume and price in the second half of the year, contributing to growth exceeding expectations.

Electrolyte profits are declining, and future month-on-month drag is limited. According to Baichuan Yingfu, the average price of electrolytes in the first quarter of 2024 was 21,000 yuan/ton, down 54.1% year on year, down 8.3% month on month, gross profit per ton was 1,110 yuan/ton, down 58.2% year on year, and slightly increased by 1.8% month on month. Industry profits have bottomed out, and the degree of drag on performance may gradually weaken in the future.

Deeply cultivate overseas markets and break through internal volumes first. The company has been deeply involved in overseas markets for more than ten years. In 2018, the company established Xinzhoubang in the US. The 40,000 ton electrolyte project at the Polish plant was successfully put into operation in 2023, and production may be further expanded to 6-8 thousand tons in the future; in addition, in 2023, the company has planned a battery chemical project in the US, which is expected to be put into operation in 2026. Thanks to a stable market pattern and high customer certification barriers, the profitability of overseas electrolytes is higher than domestic, making a positive contribution to the battery chemicals sector.

Investment advice: We expect the company's net profit to be 12.3/18.0/2.48 billion yuan in 2024-2026, corresponding to PE of 20.0/13.7/9.9 times, respectively, to maintain a “buy” rating.

Risk warning: Product prices fluctuate, overseas project progress falls short of expectations, and changes in the competitive landscape.